Consolidated expected to take over FairPoint Monday

Consolidated expected to take over FairPoint Monday

by CB Hall, Vermont Business MagazineConsolidated Communications Holdings, Inc (NASDAQ:CNSL) announced Wednesday it has completed pre-close regulatory approval and notification processes in all 17 of FairPoint's operating states and is on track to complete the Consolidated Communications—FairPoint Communications merger. The all-stock merger transaction was valued at approximately $1.5 billion, including debt ($887 million) when it was announced December 5, 2016. Consolidated expects to close on the transaction on July 3. FairPoint is Vermont's largest telecom. Illinois, Kansas, Maine, New Hampshire, New York and Vermont recently joined Colorado, Georgia, Ohio, Pennsylvania and Virginia by each granting approval of the pending merger with FairPoint. In addition, all pre-close notification processes have been completed in the six states of Alabama, Florida, Massachusetts, Missouri, Oklahoma and Washington.

"This merger will benefit customers and communities across the combined 24-state service area as we become an even stronger and more competitive company with greater scale, resources and access to an expanded 36,000 fiber-route-mile network," said Bob Udell, president and chief executive officer of Consolidated Communications. "We are committed to ensuring this merger is seamless for customers and look forward to bringing our expanded product and services portfolio to FairPoint customers in the future."

Consolidated Communications is based in Illinois and FairPoint is based in North Carolina. FairPoint's Vermont headquarters is in South Burlington.

The markets have greeted the merger with some uncertainty. Shares of both firms are on the lower end of their 52-week ranges, as their relative prices have mimicked each other. As the merger date firmed up and the state approvals mounted, especially in northern New England, shares have risen.

For mid-day Thursday, shares of FairPoint (FRP:NASDAQ) stood at $15.62, up almost 1 percent for the day. The 52-week range is $13.04 - $19.60, with a market cap of $422 million. Shares peaked in December 2016 before falling to around $14 in mid-May.

Consolidated (CNSL: NASDAQ) at the same time traded at $21.37 a share, up slightly for the day, with a 52-week range of $19.27 - $30.23 and a $1.08 billion market cap. It peaked in November 2016 at $28.59 before bottoming out in May at $19.48.

FairPoint received more good news June 26 when Maine regulators levied only a $175,000 fine for what could have been up to $500,000 for missing service quality benchmarks. Consolidated has promised $52.2 million investment in the Maine network if the merger goes through.

FairPoint, with about 2,400 employees, operates in 17 states, with 280 of those workers in Vermont, according to Mike Reed, FairPoint’s Vermont state president.

With a payroll of 1,800, Consolidated does business in 11 states, according to spokeswoman Jennifer Spaude. Given the overlaps, the merged company will operate in 24 states, she said.

"Obtaining approvals in these states is an important step toward completing the merger and indicates regulators understand the benefits of this business combination," said Michael Shultz, vice president of regulatory and public policy at Consolidated Communications. "We are pleased with the support of all the regulatory bodies."

"The combined company will be well positioned to expand its broadband reach and service offerings, while maintaining a legacy of local community support and involvement as we work toward our mission of turning technology into solutions, connecting people and enriching how they work and live," added Udell.

The company operates as both an Incumbent Local Exchange Carrier (ILEC) and a Competitive Local Exchange Carrier (CLEC) dependent upon the territory served, which means it both offers service on its own lines, as well as renting lines from other providers.

The pending sale of the two telecoms has received the greatest regulatory scrutiny in the northern New England states, where FairPoint is treated as a so-called regional Bell operating company – essentially a leftover chunk of Ma Bell. As a regional company, it provides wholesale services and tangible assets to smaller, local companies; it therefore gets more attention from regulators, according to Clay Purvis, director of DPS's Telecommunications and Connectivity Division.

Speaking of the merged company, Reed said in an email statement that “our combined networks, product suite, resources and expertise make us a more competitive provider with meaningful scale.”

In an interview for this article, Consolidated CEO Udell said that the merged company's focus “will be to take [Vermont's existing fiber-optic] network ... which FairPoint has leveraged well for the largest customers, and bring that network to the commercial and residential customers, which FairPoint hasn't totally done yet. They're on the road, but we're going to accelerate these benefits.”

While many Vermonters see the deal as a way forward from the service problems that have prompted thousands of complaints against FairPoint, Mike Spillane, business manager of Local 2326 of the International Brotherhood of Electrical Workers (IBEW), which represents FairPoint workers in Vermont, was not so sanguine.

Consolidated, he said, will have to reckon with some smoldering resentments left over from the 2014-15 FairPoint strike, which pitted IBEW and the Communications Workers of America (CWA) against the telecom provider. Nearly all the CWA workers were laid off after the strike was settled, as FairPoint moved its service center out of state.

“We're going to hope for the best, but I'm a little bit nervous about our future, for Vermont and our employees,” Spillane told VBM.

When the Public Service Board approved the sale of Verizon's northern New England assets in 2008, he recalled, “We were very scared, and everything that we were afraid of came true... They've destroyed the employees, we've had massive layoffs. We had a contract talk that diminished and took away health care benefits... We've been stripped of it all.”

Commenting on regulatory approval of the FairPoint-Consolidated deal in Maine and New Hampshire, a May 24 IBEW press release stated, “We hope that Consolidated will choose another path, one of cooperation with and respect for the workers who have built and maintain the critical network that our customers depend on.”

For the most part since the merger was revealed seven months ago, it’s been business as usual for Vermont’s largest telecom. FairPoint announced in mid-June, for instance, that it had completed broadband projects impacting more than 5,600 locations in 30 Vermont towns. The upgrades enhance its 18,000 mile fiber network in northern New England. Specifically in Burlington, Colchester, St George, Shelburne and Williston, this project brings customers download speeds of up to 50 Mbps2 -- providing broadband service to some areas for the first time.

The FairPoint-Consolidated deal, announced December 5, 2016, is an all-stock merger transaction valued at the time at $1.5 billion, including debt ($887 million), which accounts for more than half the total value of the deal.

FairPoint was trading at $17 a share at the time and immediately went up to about $19.

Under the terms of the agreement, FairPoint shareholders will receive a fixed exchange ratio of 0.7300 shares of Consolidated Communications common stock for each share of FairPoint common stock. This equates to a premium of 17.3 percent to the 30-day average exchange ratio as of December 2, 2016.

According to a Consolidated press release at the time of the sale, after closing, Consolidated’s shareholders will own approximately 71.3 percent of the pro forma combined company and FairPoint’s shareholders will own 28.7 percent.

On a pro forma basis, the combined company generated more than $1.5 billion in revenue and $566 million in adjusted EBITDA before synergies or $621 million after synergies for the 12 months ending September 30, 2016. The combined markets are expected to strengthen Consolidated’s growth opportunities, enhancing its scale with a fiber-rich network that will extend across 24 states, the company said.

FairPoint's acquisition of the Verizon assets added more than a million customers to the former company's relatively small preexisting operations, and some stormy years ensued. Service complaints piled up, the company filed for Chapter 11 bankruptcy in 2009 – emerging two years later – and, in October 2014, IBEW and CWA went on strike after contract negotiations broke down. The walkout ended in February 2015, with many concessions coming from the labor side of the negotiating table.

Profitability improved after the strike, as FairPoint trimmed its payroll and – in effect – put itself into a marketable condition. The cost-trimming measures included closing FairPoint's Burlington call center, which had been staffed by CWA workers.

State regulators in Maine and New Hampshire approved the sale to Consolidated this spring after receiving commitments that the company would make investments in infrastructure and system maintenance.

In addition to ensuring service quality, those investments will mean jobs. IBEW and CWA intervened with the Maine and New Hampshire authorities to push for the investments, and pursued the same model in Vermont.

“We got the commitment to their needing to invest in the infrastructure,” said Don Trementozzi, president of CWA local 1400, whose territory includes Vermont.

The regulatory review in Vermont yielded results largely analogous to those reached in Maine and New Hampshire, with Consolidated committing itself to investments in Vermont's telecom infrastructure in return for regulatory approval of the transaction.

Under the June 1 agreement, signed by DPS, FairPoint and Consolidated, “Consolidated shall maintain a minimum level of capital investment in Vermont for network improvements at an average level of at least 14% of total Vermont revenue for a period of three (3) years after completion of the merger.”

Further, the agreement states, “Consolidated has agreed to invest another $1M, on an average annual basis, for a period of three (3) years after completion of the merger, in capital investments specifically to target areas with on-going service quality concerns, as identified in collaboration with the Department.”

The June 1 settlement also committed Consolidated to presenting “a three-year plan for capital investment in the Vermont network” within six months of the deal's closing. Investments could include such things as the expansion of broadband service, although the agreement contains no specifics.

“This settlement gives us all the major pieces that we asked for,” Purvis observed, referring to the commitments to capital investments.

The six-month deferral of the investment plan raised the ire, however, of IBEW's Spillane, who termed that provision “pretty pathetic.”

“The bottom line is that Consolidated is not giving any specific details until six months down the road. These guys [from Consolidated] have come into the room with nice smiles, saying we're going to do good things for the state... We should know that these people are going to do good things for the state,” he said, emphasizing the know.

The six-month wait, Purvis countered, “allows them to operate the company for a time and get a handle on where the problems really are, where they could best spend that reinvestment money.”

“That is good for the workers and hopefully better at the bargaining table, and hopefully you grow the business and the employees,” he said.

Neither his union nor IBEW are officially endorsing or opposing the current sale to Consolidated. By way of explanation, he pointed out that many people have been less than pleased with FairPoint's service. That makes opposition to the deal problematical.

Asked if he thought the sale would lead to better service, Purvis echoed Trementozzi's sentiments.

“It's probably going to be the same or better,” he said. “We believe that the merged company will be in a better position financially and will be better able to compete in the telecommunications market. It is our expectation that the company runs the network well and follows all the Public Service Board rules and laws, and provides good service quality for its customers.”

Since FairPoint took over Vermont's phone lines, the DPS has received 18,611 complaints about the provider's service, Purvis told VBM. He termed the number “large” and “concerning,” all things considered.

As of June 15, 44 of those complaints remained unresolved. Any complaints not resolved by the time the FairPoint-Consolidated sale closes will become Consolidated's to deal with, he said.

Asked for his reaction to FairPoint's history of complaints, Udell said, “We've done a lot of analysis in our due diligence, and those complaints, to FairPoint's credit, have decreased [in the course of FairPoint's ownership], largely because FairPoint relied on deploying a top-notch fiber network which supports, today, their largest customers effectively.”

“This robust fiber network is what we do well, and by leveraging that [FairPoint] network across the three customer groups – wholesale, commercial, and residential – we'll bring the value of that robust network to the Vermont market.”

Consolidated CEO Udell foresees $55 million in synergies – cost savings – over the first two years following the merger, from economies such as management consolidation. He hastened to characterize the savings as “conservative, compared to typical transactions, because we know we want to reinvest in the market” – meaning infrastructure improvements – and that means cash outlays as opposed to short-term economies.

The mention of synergies appears to elicit worry among regulators as among labor representatives.

The June 1 agreement notes that, “Consolidated shall prepare information identifying Vermont-specific synergies impacts ... within six (6) months of completion of the merger and share that information once prepared during a meeting with the Department to be scheduled at the request of the Department... Consolidated has agreed that it will provide the Department’s Director of the Telecommunications and Connectivity Division with verbal notice before it announces any layoffs in Vermont.”

Asked if any rationalization of operations would translate into layoffs at the merged enterprise, Udell said, “No, in terms of customer-facing resources,” but added, “You can never say no forever.”

“If you're closest to the customer your job is probably the safest. If you're in the headquarters your job is probably more at risk... There'll be one set of executives, one set of leadership,” he hinted at economies expected at the managerial level.

“That is a great statement, but they didn't put that on the record anywhere,” Spillane said in reaction. “That would certainly help some of my people who are feeling very nervous.”

According to the Consolidated release announcing the merger, the two enterprises had generated more than $1.5 billion in revenue and $566 million in adjusted earnings before interest, depreciation and amortization (EBITDA) in the most recent 12-month period. The release also noted that the sale would mean a deleveraging of debt in relation to EBITDA: The Illinois company will acquire FairPoint's debt load of $887 million, but leverage will decrease from 4.4 to 3.8 by virtue of the transaction. Consolidated will refinance the debt through lenders including Morgan Stanley and TD Bank.

Consolidated's financial statements have attested to some recent declines in revenue, which Udell explained in terms of a 2015 FCC action which reduced federal broadband-expansion appropriations going to telecoms that had largely built out their broadband networks, as Consolidated had.

“We began losing about five million a year. Otherwise we'd have a flat-line revenue or slight growth.”

“We can get 20 megs or higher to 96 percent of our legacy Consolidated territory,” he said, touting his company's broadband. “Forty percent of our footprint can get a hundred megs or higher, and 15 percent can get a gig.”

David Tawil, portfolio manager for the New York-based hedge fund Maglan Capital, described the deal as a win for FairPoint and Consolidated shareholders alike.

“With respect to FairPoint, it allows the company to be part of a larger company ... and to benefit from greater economies of scale. In addition, the Consolidated management team is particularly experienced, and successfully so, at acquisition and integration of peers. On the Consolidated side, the additional EBITDA that comes from FairPoint's business serves as a deleveraging transaction and catalyst, and bolts on to the business the contiguous states of Maine, New Hampshire and Vermont.”

Speaking in mid-June, Tawil discounted any negative impression that the falling stock prices might generate (about 13 percent for FairPoint from the time the sale was announced and about 25 percent for Consolidated).

The decline, he said, “pales in comparison to some other larger telecom companies, like Frontier Communications and Windstream – and I expect that the pullback is simply temporary and that the stock of both [FairPoint and Consolidated] will rise in the near term.”

Asked if he felt the merger would mean better telephone service for Vermont citizens and businesses, he said, “I do. Because in this business, scale is quite a point, and this gives the greater consolidated FairPoint entity scale.”

“Our mission is to turn technology into solution,” Udell said, when asked what Vermont could expect from the merged company. “This FairPoint merger expands our fiber network to 36,000 miles of fiber across the country. That allows us to fulfill that mission, and we're laser-focused on it.”

Shareholders of both companies overwhelmingly approved the merger on March 28. Financing for the merger was secured on December 21, 2016 with favorable terms. Hart Scott-Rodino clearance was secured in January and Federal Communications Commission approval was received in May.

About Consolidated Communications
Consolidated Communications Holdings, Inc. (Nasdaq:CNSL) is a leading broadband and business communications provider throughout its 11-state service area. Consolidated Communications leverages its advanced fiber optic network and multiple data centers to offer a wide range of communications solutions, including data, voice, video, managed services, cloud computing and wireless backhaul. Headquartered in Mattoon, IL, Consolidated Communications has been providing services in many of its markets for more than a century. www.consolidated.com.

About FairPoint Communications
FairPoint Communications, Inc. (Nasdaq:FRP) provides advanced data, voice and video technologies to single and multi-site businesses, public and private institutions, consumers, wireless companies and wholesale re-sellers in 17 states. Leveraging an owned, fiber-based Ethernet network — with more than 22,000 route miles of fiber, including approximately 18,000 route miles of fiber in northern New England — FairPoint has the network coverage, scalable bandwidth and transport capacity to support enhanced applications, including the next generation of mobile and cloud-based communications, such as small cell wireless backhaul technology, voice over IP, data center colocation services, managed services and disaster recovery. www.FairPoint.com.